How to Pay Yourself as a Business Owner

You've worked hard to start your business and are certainly entitled to a paycheck. The question then becomes how best to pay yourself as a business owner. You essentially have two options: salary or dividends.

There are pros and cons with each method.

The best course of action will depend on your personal and business finances. Here are the factors to consider:

Paying Yourself a Salary

When your business pays you a salary it is considered personal income which means you'll have the opportunity to contribute to the Register Retirement Savings Plan (RRSP) and the Canada Pension Plan (CPP). How much you put into the RRSP is up to you.

However, there are maximum contribution limits. The CPP is an automatic deduction which can set up for a nice retirement fund.

In other words, the longer your work and pay into the CPP the more of a "nest egg" you'll have upon retirement.

With regard to taxes, when you pay yourself a salary, the corporation can deduct it as a business expense. On the other hand, as personal income, it is subject to taxes.

How big do you want your tax burden to be? That could determine whether or not you pay yourself a salary. 

Taking payment as a salary means you have to set up a payroll account through the Canada Revenue Agency. This means filling out T4 slips and the rest of the required paperwork. Another tax issue with a salary is that you won't be able to mitigate a business loss if your profits go up and down over the course of several years.

Paying Yourself Dividends

You'll have more cash on hand with dividend payments because they are taxed at a lower rate and don't have any automatic deductions taken out for the CPP. It's also very easy to pay yourself in dividends. Just write a check and square it up with the accounting.

By taking dividend payments you are essentially saying you'll be handling your own retirement. Not only would your CPP be less but you are prohibited from making contributions into an RRSP. If you take dividend payments you could also be precluded from taking additional tax deductions such as childcare expenses.

Overall you need to consider your company's cash flow needs, not only for current business, but also down the road. A qualified financial planner should be able to look at your business and help you make a decision that will provide you and your business with a decent level of financial security.

Corporate Financial Planning: Mutual Funds and Fees

How much do you really know about your financial planner? Here is an individual that you have entrusted with the care and well-being of your financial portfolio. Are you truly getting the best value for your hard-earned money?

Let's begin by examining the role of the financial planner. Do you actually need an expert to advise you where to best invest your money? The truth is that financial experts can predict the future as well as you. If you're like most Canadians, you invest primarily in mutual funds. However, nobody can accurately predict how a mutual fund will react. Perhaps a crystal ball will tell you about the future activity of a particular stock. True, the financial planners spend a good deal of time and energy studying trends, monitoring market activity, and keeping an eye on the financial world. But, predicting the future is not a human trait.

When you pay an advisor to direct you to the best mutual fund, you're actually paying twice. The average Canadian annually pays the mutual fund roughly $2,000 for every $100,000 invested. You don't notice the fee because it's deducted by the fund before their report to you of the fund's results. In real terms, this "fee" amounts to anywhere between a quarter to a half of the after inflation gains on your invested funds.

Returning to your planner, most planners are paid on a commission basis – the more they sell you, the more they earn. Thus, you're paying percentages to both the mutual fund and the person who directed you there. Aren't the majority of the gains supposed to stay in your pocket? One suggestion is to hire a planner on an hourly basis. This removes any conflict of interest. The planner will help you get the most for your money, especially if you have complicated tax issues to address.

It's your money! Be in control by hiring professionals who work for your best interest.

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